Branch Banking is Good For You

Despite being adjacent geographically and tightly connected economically, banks failed in Canada and the U.S. at very different rates. Specifically, no Canadian banks failed in the period, while more than 8,000 U.S. banks failed.

Why? Among other reasons is the different structure of the systems, with Canadian banks having a branch banking structuring, making them less tied to any specific region or customer. For their part U.S. banks in the period were larger in number but smaller in assets, with far more single-branch banks in the U.S. than in Canada (where there were virtually none). The larger branch network created resilience, not just in terms of assets but in terms of markets.

A new Journal of Political Economy paper talks to this issue, and produces some interesting results:

Branch Banking as a Device for Discipline: Competition and Bank Survivorship during the Great Depression

Mark Carlson
Board of Governors of the Federal Reserve

Kris James Mitchener
Santa Clara University and National Bureau of Economic Research

Because California was a pioneer in the development of large?scale branching, we use its experience during the 1920s and 1930s to assess the effects of branching on competition and on the stability of banking systems. Using individual bank balance sheets, income statements, and branch establishment data, we show that smaller incumbent banks responded to the entry of a large branch bank by adjusting their operations in a manner consistent with increased efficiency. Competition from branching networks also produced an externality: unit banks exposed to this competition were more likely to survive the Great Depression than banks not exposed to it.